Nonprofit Law Prof Blog

American Rescue Plan Act Broadens Nonprofits Eligible for PPP

The American Rescue Plan Act of 2021 signed into law on March 11, 2021 provides an additional $7.25 billion in funds to the Paycheck Protection Program (PPP).  The application period for PPP Round 2 loans will end on March 31, 2021, unless extended by Congress.  

In general, charities are eligible for a first-draw PPP loan if they employ fewer than 500 employees (full-time and part-time, who live in the United States) per the nonprofit's physical location of your nonprofit.  The Act expanded PPP eligibility to an “additional covered nonprofit entity,” defined as any nonprofit described in section 501(c) of the Internal Revenue Code (other than organizations described in 501(c)(3), (c)(4), (c)(6), or (c)(19)) and exempt from tax under section 501(a) of the Code, that employs 300 or fewer employees per physical location and does not derive more than 15% of receipts or devote more than 15% of activities to lobbying.  The nonprofit must certify on the PPP application that “[c]urrent economic uncertainty makes th[e] loan request necessary to support ongoing operations.”

Additional resources for nonprofits with respect to the Act can be found here:

• The American Rescue Plan Act: Analysis of Key Provisions Affecting Nonprofits and the People They Serve (National Council of Nonprofits)
• Summary of the American Rescue Plan Act of 2021 (Independent Sector)

 

Nicholas Mirkay, Professor of Law, University of Hawaii

Mandatory Electronic Filing for Form 990-T

The Internal Revenue Service provided the following update on the mandatory electronic filing of Form 990-Ts:

The Taxpayer First Act requires certain exempt organizations to file information and tax returns electronically for tax years beginning after July 1, 2019. Pending conversion of Form 990-T, Exempt Organization Business Income Tax Return, to electronic format, the IRS has continued to accept the 2019 tax-year versions of this return on paper.

The 2020 Form 990-T and its instructions have been updated for e-filing of returns with due dates on or after April 15, 2021. As of the beginning of March 2021, several providers have made software available to file Form 990-T electronically. Information about software providers supporting electronic filing of Form 990-T can be found on the Exempt Organizations Modernized e-File (MeF) Providers page.

Any 2020 Form 990-T with a due date on or after April 15, 2021, must be filed electronically and not on paper. A limited exception applies for 2020 Form 990-T returns submitted on paper that bear a postmark date on or before March 15, 2021.

Nicholas Mirkay, Professor of Law, University of Hawaii

Strong Fundraising Years Ahead Despite Pandemic

As reported in The Chronicle of Philanthropy, the Lilly Family School of Philanthropy recent report predicts a period of “broad philanthropic growth” is forthcoming the next two years as the economy and nonprofits recover from the Covid pandemic.  The Chronicle article provided additional detail:

The [Lilly] report forecasts a 4.1 percent increase in total giving in 2021 and a 5.7 percent increase in 2022. For individual and household giving, the report forecasts a year-over-year rise of 6 percent in 2021 and 3.9 percent in 2022. Meanwhile, giving by all types of foundations is predicted to dip by 1 percent in 2021 but then jump by 8.8 percent in 2022. The report also projects giving from estates will grow 1.1 percent in 2021 and 12 percent in 2022, while giving by corporations is predicted to rise 4.3 percent in 2021 and 6.4 percent in 2022.

Citing the Fundraising Effectiveness Project, The Chronicle article also reported that individual giving increased in 2020 over the prior year, with the greatest increase in the form of gifts under $250. Changes to the rules for charitable deductions (as described in this prior blog post), passed as temporary measures in the CARES Act, allowing more taxpayers to deduct charitable contributions. The Project also reported that the number of donors also grew by about 7% from 2019 to 2020.

Nicholas Mirkay, Professor of Law University of Hawaii

Designing An Effective & More Universal Charitable Deduction

A Tax Policy Center study released on March 17, 2021 calls for a more universal  charitable deduction that would incentivize incentive a much larger share of the population.   Due to the effects of the Tax Cuts and Jobs Act of 2017 (TCJA) a huge drop in households that claim an itemized deduction for charitable contributions--from 26% to 9%--occurred in 2019.  As a consequence, "the TCJA reduced the estimated average federal income tax subsidy for all dollars of giving by 30 percent, from about 20 cents a dollar to 14 cents a dollar. Put another way, the government took away about 6cents of subsidy on average across all charitable contributions."  Although Congress devoted about $1.5 billion in the CARES Act to institute a one-year charitable deduction of $300, thus targeting the 90%v of taxpayers who claim the standard deduction, most donors already contribute more than that amount, according to the study, thus no extra incentive is given to make additional gifts beyond that amount.  

The study makes a number of relevant points:

• [The] debate often is stated in terms of government costs and taxpayer benefits. However, there is third party to these transactions: charitable recipients.  When a tax reform increases charitable contributions by the same amount as the government revenue loss, charitable beneficiaries are the net winners.
• A more universal charitable deduction can be designed that limits gains for higher-income taxpayers while still encouraging giving at other income levels. . . . [U]niversal deductions without floors provide substantial benefits to the highest-income taxpayers who already itemize, even when they give no more (and sometimes even when they give less) in response.
• We estimate that a universal deduction with a floor of 1.9 percent of AGI would be approximately revenue neutral relative to 2019 law and would raise charitable giving by about $2.5 billion a year. If revenue neutrality had been sought under the pre-TCJA law, a revenue-neutral floor would have been a smaller percentage of AGI than it would be today.

The study also proposes additional options in creating a universal deduction:

• [T]axpayers could be given the option of making charitable contributions up to the date of filing their income tax returns, or April 15, whichever comes first. Congress has offered this option to those making deposits to individual retirement accounts, and the House of Representatives passed this type of provision in the America Gives More Act of 2014. This timing option makes almost no difference in terms of incentive, but there is strong evidence that the provision would prove an effective marketing tool.
• Second, to avoid the threat of widespread tax cheating, Congress should consider adopting a provision for electronic reporting of charitable contributions to the IRS. Tax gap studies through the years have consistently demonstrated that third-party reporting significantly raises voluntary compliance. For instance, a significant increase in compliance for
  interest and dividends occurred once they became subject to an information reporting system.

Ultimately, the study illustrates how money spent on a universal charitable deduction can significantly increase the goods and services provided to charitable beneficiaries in relation to forgone revenue if proper attention is focused on the efficiency and fairness of each dollar of subsidy.

Nicholas Mirkay, Professor of Law, University of Hawaii

 

Treasury and IRS Extend 2020 Tax Filing and Payment Deadline to May 17, 2021

You might have already heard about this, but in case you have not, here is some very important news:

The Treasury Department and Internal Revenue Service announced late today that the federal income tax filing due date for individuals for the 2020 tax year will be automatically extended from April 15, 2021, to May 17, 2021. The IRS stated that it will be providing formal guidance in the coming days.

"This continues to be a tough time for many people, and the IRS wants to continue to do everything possible to help taxpayers navigate the unusual circumstances related to the pandemic, while also working on important tax administration responsibilities," said IRS Commissioner Chuck Rettig. "Even with the new deadline, we urge taxpayers to consider filing as soon as possible, especially those who are owed refunds. Filing electronically with direct deposit is the quickest way to get refunds, and it can help some taxpayers more quickly receive any remaining stimulus payments they may be entitled to."

Individual taxpayers can also postpone federal income tax payments for the 2020 tax year due on April 15, 2021, to May 17, 2021, without penalties and interest, regardless of the amount owed. This postponement applies to individual taxpayers, including individuals who pay self-employment tax. Penalties, interest and additions to tax will begin to accrue on any remaining unpaid balances as of May 17, 2021. Individual taxpayers will automatically avoid interest and penalties on the taxes paid by May 17.

Individual taxpayers do not need to file any forms or call the IRS to qualify for this automatic federal tax filing and payment relief. Individual taxpayers who need additional time to file beyond the May 17 deadline can request a filing extension until Oct. 15 by filing Form 4868 through their tax professional, tax software or using the Free File link on IRS.gov. Filing Form 4868 gives taxpayers until October 15 to file their 2020 tax return but does not grant an extension of time to pay taxes due. Taxpayers should pay their federal income tax due by May 17, 2021, to avoid interest and penalties.

The IRS urges taxpayers who are due a refund to file as soon as possible. Most tax refunds associated with e-filed returns are issued within 21 days.

This relief does not apply to estimated tax payments that are due on April 15, 2021. These payments are still due on April 15. Taxes must be paid as taxpayers earn or receive income during the year, either through withholding or estimated tax payments. In general, estimated tax payments are made quarterly to the IRS by people whose income is not subject to income tax withholding, including self-employment income, interest, dividends, alimony or rental income. Most taxpayers automatically have their taxes withheld from their paychecks and submitted to the IRS by their employer.

Prof. Vaughn E. James, Texas Tech University School of Law

Mayo Clinic Receives $60 Million Gift for Patient Tower

Today's Philanthropy News Digest is reporting that the Mayo Clinic in Rochester, Minnesota, has announced a $60 million gift from philanthropist Helene Houle in support of efforts to transform the delivery of health care in Minnesota.

In honor of the gift, the recently completed 430,000-square-foot tower at Mayo Clinic Hospital -- Rochester, Saint Mary's Campus, will be named after Houle's husband, John Nasseff, who died in 2018 on his ninety-fourth birthday.

According to the Digest

The family are longtime supporters of the medical center. Nasseff's youngest son, Arthur, had lifesaving surgery at Saint Mary's Hospital as a teenager in the 1960s, and over the years Nasseff and Houle made several gifts to Mayo in honor of his surgeon, Burton Onofrio, as well as other physicians who have cared for the family.

Reacting to the gift, Mayo President and CEO, Gianrico Farrugia, said, "John Nasseff and Helene Houle have had a significant impact on Mayo Clinic over the decades of their support. We are incredibly grateful to Ms. Houle for this generous gift, and we cannot think of a more fitting way to honor Mr. Nasseff."

Helene Houle added: "When I go to Mayo, I know I'm going to receive the best care possible. There's a special human touch that gives you confidence in knowing you are getting the answers you can trust.”

Prof. Vaughn E. James, Texas Tech University School of Law

Educational Philanthropy Gets Ethical Update

Today's NonProfitTimes is reporting that the standards, guidelines and definitions for reporting the results of educational philanthropy have been updated with new guidance on gift counting, a new definition of educational philanthropy and for the first time, a statement on ethics.

According to the Times, the Council for Advancement and Support of Education (CASE) recently released the CASE Global Reporting Standards. For the first time since its initial publication in 1982, the standards offer a digital subscription and six-country supplement.

Previously referred to as the CASE Reporting Standards and Management Guidelines, the CASE Global Reporting Standards is a common set of standards, guidelines and definitions for reporting the results of educational philanthropy activities at schools, colleges and universities across the globe.

The guidelines underpin CASE’s ongoing work to guide the profession, ensure integrity and consistency in educational advancement work, and to support CASE’s own work in data collection and reporting with its AMAtlas suite of tools such as the recently released Voluntary Support of Education (VSE) survey results.

The Times notes three key changes within the standards this year:

• Updated guidance around gift counting, funds received, new funds committed, and donor control and influence.
• For the first time, the CASE Global Reporting Standards added the CASE Statement on Ethics to the front of the book and adds the CASE Principles of Practice for the advancement disciplines, all recently updated by the CASE Commissions for Philanthropy, Communications and Marketing, and Alumni Relations and approved by the CASE Board of Trustees. The CASE Principles of Practice provide global guidelines for those professions and represent the community-derived foundations on which the advancement profession stands.
• A new definition for educational philanthropy: Voluntary act of providing private financial support to nonprofit educational institutions. To be categorized as philanthropy in keeping with CASE standards, such financial support must be provided for the sole purpose of benefiting the institution’s mission and its social impact, without the expressed or implied expectation that the donor will receive anything more than recognition and stewardship as the result of such support. 

Announcing the new guidelines via a press release, CASE President & CEO Sue Cunningham stated, “The CASE Global Reporting Standards have at their core the CASE Ethics Statement and Principles of Practice for the profession. As institutional funding has evolved and created increasing expectations for philanthropic support, the need for clear guidance is paramount.”

The standards were reviewed and updated under the leadership of the CASE Reporting Standards and Management Guidelines Working Group. The group is comprised of 19 CASE volunteers and staff, co-chaired by Matthew Eynon, Vice President for College Advancement at Franklin & Marshall College in Lancaster, Pennsylvania, and Brian Hastings, President and CEO of the University of Nebraska Foundation in Lincoln, Nebraska. Six groups of regional volunteers also provided guidance on the new regional supplements for Australia/New Zealand, Canada, Mexico, Singapore, the United Kingdom, and the United States, including text in Spanish and French.

Commenting on the project, Enyon had this to say: “In developing the first global reporting standards for the advancement profession, CASE has decided to make a statement about the power, impact and importance of philanthropy around the world. The working group members represented many of the leading advancement programs in the world, and their efforts helped to ensure we defined standards which represent excellence in our profession.” 

Hastings added: “The standards are an essential element of upholding the integrity of our profession on a global scale. By reporting and benchmarking annual and campaign results consistent with the standards, all CASE member institutions can compare results with a greater level of confidence and understanding.”

Print copies and digital subscriptions of the Global Reporting Standards are available with a CASE membership discount from the CASE bookstore.

Prof. Vaughn E. James, Texas Tech University School of Law

 

 

National Council of Nonprofits calls for change in use of Form 1023-EZ

In January of this year, the National Council of Nonprofits issued a statement containing a number of criticisms of recent Internal Revenue Service policy. Among these criticisms was a call for the immediate withdrawal of IRS Form 1023-EZ. The NCN feels that this is a necessary step because the Form, in its current form, is particularly vulnerable to abuse by entities falsely claiming to be charitable organization. The Council points to some startling statistics in defense of its assertions: first it notes that “virtually every entity that applies using the Form 1023-EZ receives tax-exempt status regardless of eligibility,” followed shortly by the damning pronouncement that the IRS’ “erroneous approval rate [of 1023-EZ applications] was found to be 46 percent.” It should be noted that the Council is not relying on its own findings when issuing these statements: all of its cited statistics come from the Taxpayer Advocate, which is itself a governmental entity existing in close proximity to the Internal Revenue Service.

To view the Council’s open letter in its entirety, see here

David Brennen, Professor of Law at the University of Kentucky

The House passes For the People Act

Earlier this year, this blog discussed legislative attacks on ‘dark money’ and the IRS regulations that allow shadowy donors of significant monetary amounts to 501(c)(3) organizations to cloak their identity. That battle is continuing among federal lawmakers as last week the For the People Act (H.R.1) passed in the House by a narrow ten vote margin and now advances to the Senate where it will quite possibly be similarly contested. The For the People Act, among other measures, seeks to repeal 2020 IRS regulations that ended the practice of collecting identifying information of donors to nonprofit organizations. The IRS maintained that requiring nonprofits to simply keep records of the amounts of donations made to their causes would be sufficient for the purposes of administering the tax code: in the wake of an especially tumultuous election, democratic legislators argue that more stringent record-keeping rules are necessary to promote transparency of organizations exercising political influence through donations. H.R. 1 passed largely along party lines in the House: it remains to be seen how the proposed law will fare in the Senate.

For this blog’s earlier post on the Spotlight Act, see here

The House’s For the People Act can be perused in its entirety here

David Brennen, Professor of Law at the University of Kentucky

Michigan courts seek to clarify the sometimes blurry line between for-profit and nonprofit

Distinguishing between the activities of for-profit and nonprofit organizations that have business dealings with one another can be challenging for tax authorities when determining tax liability. The Michigan court of appeals recently fought its way through such a thicket in determining whether Dexter Wellness Center, a nonprofit organization in the state, fell afoul of a state statute imposing a lessee-user tax on nonprofits that lease their premises to for-profit organizations. The City of Dexter, where the DWC is located, sought to tax the organization under this law on the grounds that a for-profit management company was given control of the Wellness Center’s operations, thereby nullifying the charitable purpose behind the Center. The state’s court of appeals has affirmed the decision by the Michigan tax tribunal that, in truth, the for-profit’s role is more akin to that of a paid agent: since the nonprofit entity retained ultimate control over what went on at the wellness center, it retains its tax-exempt status.

For more information, see the Law360 article written on the matter by Asha Glover at https://www.law360.com/tax-authority/articles/1361863

David Brennen, Professor of Law at the University of Kentucky

Israeli public interest group accused of improper political activity

    A large nonprofit donor to progressive causes in Israel is facing what will likely be a costly litigation disputing its financial activities in Israel. The New Israel Fund is being sued by the Zionist Advocacy Center, a fellow Israel public interest group that alleges the NIF engaged in political activities by funneling money to organizations opposed to Israeli prime minister Benjamin Natanyahu. Per the strictures of 501(c)(3) the NIF, as a nonprofit organization, is prohibited from lending its support to political candidates. At the current phase of the lawsuit, the NIF is appealing District Court Judge Woods’ decision to not dismiss the case against them: Judge Woods ruled that the plaintiff has argued sufficiently that the NIF may have taken the actions alleged in the lawsuit to allow the action to proceed. It remains to be seen if the NIF will have better luck arguing in their Second Circuit appeal that allowing discovery to proceed would constitute a pointless expenditure.

For more information, see the Law360 article on the subject by David Hansen: https://www.law360.com/tax/articles/1360859/ny-israeli-group-seeks-appeal-of-challenge-to-tax-exemption

 

By David Brennen, Professor of Law at the University of Kentucky

March 25-26: Data & Technology: Resources and Implications for Nonprofit Regulation and Oversight

The Urban Institute will host a meeting of key stakeholders to discuss Data and Technology: Resources and Implications for Nonprofit Regulation and Oversight on March 25th and 26th. Persons interested in participating should contact Elizabeth Boris (eboris@urban.org) or Cindy Lott (cml2137@columbia.edu). Here is the description of the event:

The Urban Institute's Regulation of Nonprofits and Philanthropy Project will convene key stakeholders to consider how current research and data platforms could inform regulation and oversight of US nonprofits. The event will focus on data and technologies charities regulators require to succeed in their oversight roles. We invite you to join us, researchers, leaders from data-providing organizations, and state and federal charities regulators to explore how to promote data-informed nonprofit regulation.

Lloyd Mayer

HBCU's of Maryland may win big with upcoming legislation

    This year may well prove to be one of exciting developments for historically black colleges in Maryland: a pair of bills currently undergoing the legislative process in the state stand to bring nearly six hundred million dollars to Morgan State University, Coppin State University, Bowie State University and the University of Maryland Eastern Shore (all of which are public universities). These funds are being pursued as settlement in a lawsuit dating back to 2006: this action alleges decades of discriminatory funding allocation by the state’s funding entities in favor of Maryland’s predominantly white educational institutions. Despite more than a decade of litigation and a veto by the state’s governor last year in the midst of the pandemic, it appears that supporters for the bill’s passage have amassed sufficiently overwhelming bipartisan support to assure the bill’s passage. Quite possibly the problems identified by this lawsuit are not unique to Maryland’s educational structure: perhaps the next decade will see similar actions in other states across the country.

For more information on the lawsuit and the legislative battle for the passage of this bill, see the attached Baltimore Sun article by Bryn Stole: https://www.baltimoresun.com/politics/bs-md-pol-hbcu-lawsuit-20210119-hkwjten5pzdybcem7pj5r5ppji-story.html

For information regarding Michael Jones, one of the Maryland lawyers spearheading the lawsuit on behalf of the plaintiffs, see yesterday’s Law360 article by Sameer Rao: https://www.law360.com/articles/1360192/a-kirkland-partner-s-journey-to-a-historic-hbcu-settlement

By David Brennen, Professor of Law at the University of Kentucky

Eguzo: Governance and Accountability

Louis Eguzo (Ph.D. candidate at the University of Maryland) has posted Governance and Accountability: A Systematic Review to Examine Its Impact on Social Mission in Nonprofit Organizations. Here is the abstract:

This qualitative review examines the impact of governance and accountability on social missions in nonprofit organizations (NPOs). The purpose of this research is to conduct a systematic review of the literature to identify the impact of governance and accountability on social missions. The research explored 25 extant works of literature leveraging stakeholder theory to identify the impact of governance and accountability. The author suggests that this research may contribute to the body of knowledge related to governance, accountability, and conflict of interest in NPOs. The implication of this review will inform recommendations for NPOs on how to measure outcomes, be accountable, and practice governance that is devoid of crisis. The articles are relatively recent and appeared between 2000-2020.

Lloyd Mayer

McLaughlin: Conservation Easements and the Proceeds Regulation

Nancy McLaughlin (University of Utah) has posted Conservation Easements and the Proceeds Regulation (forthcoming Real Property Trusts & Estate Law Journal). Here is the abstract:

This article provides an in-depth look at Treasury Regulation § 1.170A-14(g)(6)(ii), known as the proceeds regulation. The proceeds regulation is intended to protect the public investment in conservation if a perpetual conservation easement that was the subject of a charitable deduction under Internal Revenue Code § 170(h) is later extinguished. A proper understanding of the proceeds regulation is critical because the public investment in deductible easements is significant—billions of dollars are being invested in such easements annually—and the regulation has recently been subject to challenges regarding its interpretation and validity. This article examines the history and operation of the proceeds regulation as well as possible alternatives. It explains that the proceeds regulation provides a simple and easy-to-implement rule that avoids a host of future valuation difficulties. It demonstrates that the proceeds regulation is neither irrational nor inherently unfair to donors or subsequent property owners, and serves to temper the perverse incentive that property owners may have to seek to extinguish easements. This article concludes that the proceeds regulation provides a reasonable solution to the difficult problem of ensuring that the conservation purpose of a contribution will be protected in perpetuity as required by § 170(h)(5)(A).

Lloyd Mayer

Polk: Collecting Earmarked Donations Through Mobile Payment Apps

Mary Scott Polk (J.D. candidate at the University of Mississippi) has posted What to Do With Leftovers: Collecting Earmarked Donations Through Mobile Payment Apps. Here is the abstract:

With the rise in mobile payment applications, charitable donations using these platforms are increasing; equally, the use of a conduit between a donor and a charity to solicit and collect donations for the charity's benefit is growing. If a charity is overfunded or the charitable purpose is no longer available, the conduit is caught holding a pool of designated donations without the ability to contact the donors for permission for a similar or alternate use. Using the Internal Revenue Code requirements, the authority and regulations are not apparent for a charitable contribution through a conduit, particularly not for a conduit’s use of a mobile payment application. Part I of this Comment provides an overview of the conduit situation and the complications that arise. Part II introduces the requirements of a charitable contribution and the services that mobile payment applications offer. Part III analyzes three donation methods: a contribution directly to a 501(c)(3) organization, a contribution to an individual, and a contribution to a 501(c)(3) organization through an individual. Part IV examines the potential solutions to the issue of overfunded charities and the motivations behind each. Finally, Part V offers a brief overview of the prevalence of the issue and the future of mobile payment applications. The interaction of the detailed requirements of the Internal Revenue Code for a charitable contribution and mobile payment applications’ privacy policies, without clear authority or direction on the specific conduit situation, has the potential to be problematic and challenging for the contributor, conduit, charitable organizations, and mobile payment applications.

Lloyd Mayer

Int'l Developments: Ten Cases That Shaped Charity Law in 2020, European Legal Philanthropy Environment, Global Philanthropy, and Tax Incentives for Cross-Border Giving

There have been several recent publications and reports of note from outside of the United States:

• Ten Cases that Shaped Charity and Nonprofit Law in 2020 And Ten Trends to Consider by Myles McGregor-Lowndes and Frances Hannah (both Queensland University of Technology): Based on a review of over 200 cases.

• Legal Environment for Philanthropy in Europe (2020) by Philanthropy Advocacy, a joint project of the Donors and Foundations Network in Europe (DAFNE) and the European Foundation Centre (EFC).

• Global Philanthropy: Does Institutional Context Matter for Charitable Giving? (Nonprofit and Voluntary Sector Quarterly) by Pamela Wiepking (Lilly Family School of Philanthropy), Femida Handy (University of Pennsylvania), Sohyun Park (Yonsei University), and others. Here is the abstract:

In this article, we examine whether and how the institutional context matters when understanding individuals’ giving to philanthropic organizations. We posit that both the individuals’ propensity to give and the amounts given are higher in countries with a stronger institutional context for philanthropy. We examine key factors of formal and informal institutional contexts for philanthropy at both the organizational and societal levels, including regulatory and legislative frameworks, professional standards, and social practices. Our results show that while aggregate levels of giving are higher in countries with stronger institutionalization, multilevel analyses of 118,788 individuals in 19 countries show limited support for the hypothesized relationships between institutional context and philanthropy. The findings suggest the need for better comparative data to understand the complex and dynamic influences of institutional contexts on charitable giving. This, in turn, would support the development of evidence-based practices and policies in the field of global philanthropy.

• Tax Incentives for Cross-Border Giving in an Era of Philanthropic Globalization: A Comparative Perspective (Canadian Journal of Comparative and Contemporary Law) by Natalie Silver (University of Sydney) and Renate Buijze (Erasmus University Rotterdam). Here is the abstract:

The 21st century has ushered in an era of philanthropic globalization marked by a significant rise in international charitable giving. At the same time, cross-border philanthropy has raised legitimate fiscal and regulatory concerns for government. To understand how donor countries have responded to this changed global philanthropic landscape, we use comparative tax methodology to develop a spectrum of approaches to the tax treatment of cross-border giving and apply tax policy criteria to critically evaluate the divergent approaches of Australia and the Netherlands, located at opposing ends of the spectrum. Findings from the comparative analysis reveal that in the current global environment for philanthropy there is a strong case to be made for allowing tax deductible donations to cross borders.

Lloyd Mayer

Fairbairn v. Fidelity Charitable: Duty Remains Unclear, Written Policies Key

A federal district court has ruled in favor of Fidelity's donor advised fund sponsor organization ("Fidelity Charitable")  in a lawsuit brought by donors upset with how the organization handled a large stock donation. A few thoughts on the February 26th decision in Emily Fairbairn et al. v. Fidelity Investments Charitable Gift Fund:

• The case shows how important the DAFs associated with commercial investment firms have become. It is disputes involving donors for these DAFs that are likely to be the primary source of litigation in this area going forward, as the attention this case garnered illustrates. The court even stated that DAFs are housed at "a 501(c)(3) nonprofit organization that has usually been created by a for-profit financial institution" (top of page 3). I am not sure the "usually" is correct, but that is clearly the court's perception, and likely the current perception of much of the public.

• The case shows the importance of clear and well communicated written policies for DAF sponsors. The Fairbairns lost in part because some of their allegations contradicted Fidelity Charitable's written policies regarding how non-monetary donations would be handled that had been repeatedly shared with them. For example, the court found that the Fairbairns failed to prove by a preponderance of the evidence that Fidelity Charitable had promised to not sell any shares until January 2018, in large part because even if an oral promise along those lines had been made it was unreasonably to rely on it given the written materials provided (top of page 8). The court also found that even if Fidelity Charitable had a duty to the Fairbairns, Fidelity Charitable did not violate that duty in part because because the immediate sale of donated shares was consistent with Fidelity Charitable's published policies (bottom of page 15).

• The case leaves for another day whether DAF sponsors owe a duty of care to DAF donors. The court concluded that if a duty was owed under California law it is not the same as the duty owed by an investment advisor to an investor who owns the relevant securities (page 18). But more importantly, the court decided to "not finally resolve whether Fidelity Charitable owed the Fairbairns a duty of care under California law" as doing so was not necessary for it to rule in favor of Fidelity Charitable. So it will be left to future courts, including in California, to resolve that important issue.

Media Coverage: Bloomberg (subscription req3uired); Law360 (sign up required); Wall Street Journal (subscription required).

Lloyd Mayer

IRS Releases Interim Guidance on Verifying the Filing of 501(c)(4) Notices

The IRS has publicly released a March 1st Memorandum to Exempt Organizations Examinations Employees on "Interim Guidance on Verifying Forms 8976 Were Filed and Applicable Penalties". Section 501(c)(4) organizations that either came into existence after July 8, 2016 or while coming into existence earlier had not submitted either a Form 1024 or Form 990 series return (990, 990-EZ, or 990-N) on or before that date are required to file Form 8976 with the IRS to notify it of their existence. The requirement is codified in IRC section 506 and described in both Rev. Proc. 2016-41 and Treas. Reg. § 1.506-1.

The memo instructs those employees to do the following:

1. Examiners must perform a filing check for Form 8976 during all examinations of IRC
   Section 501(c)(4) organizations.
2. If you determine that the organization failed to timely file a completed Form 8976,
   consider the IRC Section 6652(c)(4) penalties.

Hat Tip: EO Tax Journal

Lloyd Mayer

GAO on For-Profit to Nonprofit College Conversions

The U.S. Government Accountability Office released a report titled IRS and Education Could Better Address Risks Associated with Some For-Profit College Conversions. Here are excerpts from the highlights:

What GAO Found

GAO identified 59 for-profit college conversions that occurred from January 2011 through August 2020, almost all of which involved the college's sale to a tax-exempt organization. In about one-third of the conversions, GAO found that former owners or other officials were insiders to the conversion—for example, by creating the tax-exempt organization that purchased the college or retaining the presidency of the college after its sale (see figure). While leadership continuity can benefit a college, insider involvement in a conversion poses a risk that insiders may improperly benefit—for example, by influencing the tax-exempt purchaser to pay more for the college than it is worth. Once a conversion has ended a college's for-profit ownership and transferred ownership to an organization the Internal Revenue Service (IRS) recognizes as tax-exempt, the college must seek Department of Education (Education) approval to participate in federal student aid programs as a nonprofit college. Since January 2011, Education has approved 35 colleges as nonprofit colleges and denied two; nine are under review and 13 closed prior to Education reaching a decision.

IRS guidance directs staff to closely scrutinize whether significant transactions with insiders reported by an applicant for tax-exempt status will exceed fair-market value and improperly benefit insiders. If an application contains insufficient information to make that assessment, guidance says that staff may need to request additional information. In two of 11 planned or final conversions involving insiders that were disclosed in an application, GAO found that IRS approved the application without certain information, such as the college's planned purchase price or an appraisal report estimating the college's value. Without such information, IRS staff could not assess whether the price was inflated to improperly benefit insiders, which would be grounds to deny the application. If IRS staff do not consistently apply guidance, they may miss indications of improper benefit.

Education has strengthened its reviews of for-profit college applications for nonprofit status, but it does not monitor newly converted colleges to assess ongoing risk of improper benefit. In two of three cases GAO reviewed in depth, college financial statements disclosed transactions with insiders that could indicate the risk of improper benefit. Education officials agreed that they could assess this risk through its audited financial statement review process and could develop procedures to do so. Until Education develops and implements such procedures for new conversions, potential improper benefit may go undetected.

* * *

What GAO Recommends

GAO is making three recommendations, including that IRS assess and improve conversion application reviews and that Education develop and implement procedures to monitor newly converted colleges. IRS said it will assess its review process and will evaluate GAO's other recommendation, as discussed in the report. Education agreed with GAO's recommendation.

Coverage: Inside Higher Ed; The Century Foundation.

Lloyd Mayer